The concept the state chartering trade ventures dates back to ancient Rome, and to India’s 300 B.C. Maurya Empire. To encourage such enterprises, governments granted some form of limit to the liabilities which might be incurred. American discovery was pioneered by such corporations and each of the new United States kept chartering since their earliest days.
Today we still want corporate protection. If the startup goes bust, we don’t want our grandchildren’s wages garnisheed to pay back creditors. “It’s just a wise safeguard for almost any business to declare itself a legal entity,” says Martin Shenkman, CPA and attorney specializing in corporate and tax law. “Even a one-person, garage-based business has liability.” Ever since it first gained acceptance in the last quarter of the nineteenth century, the LLC has found popularity by companies seeking the same liability protection of general incorporation, without the added expenses and legal hassles.
* Why LLC? In the eyes of the law, Granddad's little $14,000-a-year Christmas tree farm lies just as wide open to a $10-million lawsuit as General Motors. This makes LLC too good an insurance deal to pass up. In event of a lawsuit or business failure, LLC protection limits your copay to the amount you put into the company. Also, certain tax savings may come to partners or proprietors of an LLC, based on how they receive money from the company.
Yet more immediate, and almost as valuable a benefit of taking on the LLC mantle is the great improvement in the company’s image. Bankers, vendors, and customers all see the limited liability corporation as a business to be taken more seriously. They feel they are dealing with an established entity, who knows and operates by the rules.
One New Jersey, home-based court recorder received a $400,000 contract after adding the LLC to her company title. Based on her website, the county court thought they were outsourcing to a much larger firm.
* The Right Foot. Yes, you can go online, and for bargain basement fees, set up an LLC using boilerplate forms. You can even talk through the process over phone by dialing an 800 number. “I simply cannot overemphasize how penny-wise and pound-foolish this is,” says Shenkman. “In my decades of law, I have yet to see anyone try this and do it remotely right.” As with most safeguards, you don’t want the cheapest, you want the best, that individually suits you.
Any good corporate attorney can guide the business owner through the LLC process. If your company’s attorney is not a versed in corporate law, Shenkman suggests adding an accountant to the interview to advise on various tax-advantages. “This is not legally esoteric,” he says. “Typically, a half-hour interview can give you the customization your business requires.”
The first question this lawyer can answer is what type of liability protection your corporation requires - General incorporation, S-corp (mostly for tax purposes), LLC. And for 90 percent of the businesses, he will suggest the latter.
* Applying Yourself. Any incorporation is a state-granted charter, and obviously companies file for LLC in the state in which they are headquartered. Additional LLC’s may be required if the company does business in them. Or, in some cases, only an authorization from other states may be required, e.g. if a company operates an active sales force in neighboring states. Generally, merely shipping goods to another state does not require a second LLC. If venturing to file in another state, make sure your attorney is licensed for that state - or establish a relationship with one who is.
An owner may also opt for separate LLC’s for different aspects of his business. The more you slice and dice, the less you stand to loose in any single incident. The retail store owner may have his store and property under one LLC while is business is covered under another. This way, if someone falls in the parking lot, sues, and wins, the owner still walks away with his business in tact. While this seems a limitless tactic, the state will probably disallow artificial divisions separating what is obviously an integrated business entity. Also, the extra LLC’s may prove too costly or involved. This is where experienced legal guidance gives you your money’s worth.
“Protecting intellectual property through an LLC is becoming more popular all the time,” says Shenkman. Domain names, websites, any publications, and materials detailing your firm’s operations can fall under the LLC umbrella. Shenkman notes that the business owner, in applying for the LLC, may also set it in a trust for his child. “This separates it from you, and gives the child some funds to pay for his college education,” he says.
Before sending the form off, be careful to limit your limited liability corporation. If you are entering a partnership to fix up and resell real estate, you may not want your partner purchasing a magazine, with all its inherent liabilities, and trying to cram it under the same LLC. Tailoring one LLC to one venture remains an optimum plan. * Operating under LLC. Sometime after filing, a little kit will arrive in the mail, telling the business owner that he has officially stepped into the league of Limited Liability Corporations. Open it. Inside, along with the stack of papers, such as forms for meeting minutes, will be a corporate seal. This at first may appear as some medieval throwback, marking you as liege to some feudal lord, but it has real advantages. This seal is to go on all official company documents, and, as with the “LLC” after your firm’s title, it provides valuable prestige.
It shows that this company considers a given document worth backing with the power of the state, and that the recipient is dealing with a company that knows the rules. While its use is not legally required, it will impress two very formidable entities: the IRS and any government agency with whom you seek contract.
Another item that will shake out of the kit is the LLC’s operating agreement. “This is somewhat like a shareholder’s agreement,” says Shenkman, “yet is a bit more through.” It lists the by laws, spells out the order of succession, what happens if someone dies, etc. It’s worth studying, just to make sure that the state’s plans for your business match your own.
The one final step in the LLC process is operating under it. “Most people view the LLC as something that is gained, lasts forever, and can be put in a drawer and forgotten. Not so.” says Shenkman. You may have to file 30-day financial reports, hold annual meetings, and produce a consensus document. Complying with these directives strengthens the corporate armor when the company is threatened.
Governments and their people live off of the trade of commercial adventurers, like yourselves. Whether it’s sailing a spice ship to the Indies or launching a software startup, each enterprise involves an extra ordinary risk, and returns benefits to society. Thus, the state sees it as only right to grant a little reward to those who’ve ventured, and encouragement to those getting ready. The LLC is a marvelous, and justly deserved boon. One of which, as Shenkman says, it is only wise to take advantage. B4
Martin Shenkman is called upon by television, radio, and print media to explain tax and corporate liabilities, for a very good reason. He is not only an expert, but he knows the art of simplifying laws of seemingly Byzantine complexity. A native New Yorker, Shenkman attended University of Pennsylvania’s Wharton School of Business, graduating with a bachelor’s in accounting and economics in 1977, He then took his MBA at the University of Michigan, focusing on tax and finance.
Upon earning his law degree from Fordham University in l985, Shenkman served with the New Jersey, New York and U.S. District courts. He has held his private practice for the past 20 years centering on tax and estate planning, and closely held business taxation. In addition to authoring 34 books on these subjects, Mr. Shenkman has written hundreds of articles, and publishes a newsletter “Practical Planner.”
